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"Patent troll" behavior continues to attract attention

This past June, President Obama issued a proposal of five executive actions and seven legislative recommendations aimed at curbing abuse of patent litigation.1 The proposal deals with the costs resulting from litigation and threatened litigation by Patent Assertion Entities (PAEs or “patent trolls”).2 The proposal notes that patent litigation costs in general “have ballooned in recent years and today, [such that] several major companies spend more on patent litigation and defensive acquisition than on research and development.”3

President Obama’s announcement followed on the heels of a lawsuit filed in May by the state of Vermont against MPHJ Technology Investments, LLC, (“MPHJ”) for allegedly violating the Vermont Consumer Protection Act. Vermont alleged that MPHJ sent unfair and deceptive letters threatening patent infringement litigation to small businesses throughout the state. For further discussion of the Vermont lawsuit see the July issue of the Baker Botts IP Report.4

Additionally, in July, the Nebraska Attorney General initiated an investigation of law firm Farney Daniels to determine if demand letters alleging the infringement of certain patents sent by Farney Daniels violated the Nebraska Consumer Protection Act.5 Nebraska’s Attorney General has demanded that Farney Daniels refrain from initiating any new patent infringement enforcement efforts in Nebraska until the investigation has been resolved.6

Of the legislative actions recommended by President Obama, four deal with problems posed by PAEs. Two of the legislative proposals and one Executive Action are intended to address the difficulties faced by defendants, especially small defendants, in coordinating their defensive strategies against PAEs. First, the proposed legislation requires parties that send demand letters, file infringement suits, or seek PTO review of a patent, must file updated patent ownership information to identify the “Real Party-in-Interest.” This recommendation is based on the fact that PAEs often “hide their identity by creating numerous shell companies and requiring those who settle to sign non-disclosure agreements, making it difficult for defendants to form common defensive strategies (for example, by sharing legal fees rather than settling individually).”7 Second, the proposed legislation would incentivize public filings of demand letters. The Executive Action also deals with the Real Party-in-Interest, directing the U.S. Patent and Trademark Office (PTO) to initiate a rulemaking process to require patent applicants and owners to regularly update ownership information when they are involved in proceedings before the PTO, specifically identifying the “ultimate parent entity” in control of the patent or application.

The third legislative proposal would give courts more discretion to award attorney’s fees as a sanction for abusive court filings. The proposal suggests that the award of attorney’s fees should be similar to the legal standard that is currently applied in copyright infringement lawsuits. Currently, under 35 USC § 285, courts may only award attorney’s fees to the prevailing party in patent infringement cases in “exceptional cases.” Under the copyright statute, however, the court has discretion to award costs and a reasonable attorney’s fee to the prevailing party.8 Such a discretionary award of attorney’s fees may serve as a disincentive for patent holders to pursue litigation unless they truly believe their claims to be of merit. However, in situations in which a small business is threatened with litigation unless it makes a payment, as in Vermont and Nebraska, awarding attorney’s fees may do little to dis-incentivize threats from patent holders against businesses who cannot afford the cost and time of any litigation, even if they could potentially recover their costs and attorney’s fees.

Finally, the proposed legislation would offer consumers and businesses “better legal protection against liability for a product being used off-the-shelf and solely for its intended use,” and would stay judicial proceedings against consumers when an infringement action has also been brought against a vendor, retailer, or manufacturer. What this “better legal protection” would entail is unclear from the proposal. However, the proposal is meant to address the same types of actions as those in Vermont and Nebraska, in which small businesses were threatened with litigation and offered a quick settlement option. The President has also announced an Executive Action to provide greater education and outreach from the PTO. This education would be primarily focused on providing small businesses and technology users with information regarding their rights and options when faced with an allegation of patent infringement.

There are currently several pieces of proposed legislation aimed at PAEs. For example, the Patent Abuse Reduction Act of 2013 (S.2013) that was introduced by Senator Cornyn (R-Texas) in late May contains several provisions that are similar to those proposed by President Obama.9 The Act proposes amending 35 USC § 285 to allow a prevailing party to recover costs, expenses, and attorneys fees unless “the position and conduct of the non-prevailing party were objectively reasonable and substantially justified.”10 While not the same discretionary standard that the President has proposed, the intent of Senator Cornyn’s proposed bill is clearly the same as that of the President’s proposal: to create a stronger disincentive for initiating non-meritorious litigation.

Senator Cornyn’s bill would also amend 35 USC § 281 to include an enhanced pleading standard for claims of patent infringement. Of particular note, the bill would require a party alleging infringement to disclose “the identity of any person with a direct financial interest in the outcome of the action, including a right to receive proceeds, or any fixed or variable portion thereof.”11 Similar to the President’s proposal to require disclosure of the Real Party in-Interest, Senator Cornyn’s proposed legislation would provide greater transparency as to the entities ultimately in control of the asserted patents.

While it is unclear whether any of the proposed legislation will come to pass, there does appear to be bipartisan support for reforms to curb the practices of PAEs.

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